What if you could buy stocks at bargain prices, just as a bull market begins on Wall Street? What if you were able to sell those stocks right before the Dow Jones Industrial Average took a nosedive?
Good luck with that strategy, because it’s not going to happen, at least on a consistent basis. Ever since securities traders banded together to launch the first stock markets in Europe hundreds of years ago, investors have tried to time the market. They look for signs of an upward or downward swing and try to adjust their positions accordingly.
Today, it seems like every media commentator has an opinion on whether the stock market will go up, down or sideways in the next few days. But if you’re a long-term investor, those daily fluctuations don’t really mean very much. That’s because it’s your time in the market that counts.
For instance, if you are in your 20s or 30s and just starting to put money into a 401(k), IRA or other retirement fund, your money should be able to grow for decades before you need to start thinking about making withdrawals. Because your dollars will have a lot of time in the market, you can consider including small-cap U.S. stocks, emerging market equities or other types of growth-oriented assets in your portfolio.
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On the other hand, if you are nearing retirement, you may want to adjust the mix of assets in your portfolio so you are less vulnerable to a market downturn at a time when you need that money. This doesn’t mean getting out of stocks – it just means talking with your financial advisor about reducing some of the risks.
That’s one of the clear lessons from the Wall Street meltdown of 2008, when any stocks lost a large percentage of their value. Investors who had put all their money into the stock market typically suffered a greater loss than those who had diversified their portfolios by including a variety of bonds, managed futures or other alternative investments.
Then, some investors who had focused on stocks compounded their error by selling their shares when the market was at a low point, locking in their losses. Because they let their fears drive them out of stocks, they missed out on the strong market rebound that has continued for more than five years.
In my columns, I have often emphasized the importance of diversifying your investments and avoiding making emotional decisions based on fear or greed. I also believe that staying invested in the U.S. and global markets is a better strategy for most investors than trying to time the market.
However, within that overall framework, there are times when it may make sense to adjust the mix of assets in your portfolio in order to take advantage of potential return opportunities or lower risks.
One of the things that makes the investment world so fascinating, is that the U.S. and global markets are constantly changing. Just try to tune out the daily “noise” and remember to stay focused on your long-term goals.
Andrew Menachem, CIMA®, is a Wealth Adviser at The Menachem Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley. Follow Menachem on Twitter @AMenachemMS.